Emil Harsev, financier: Bulgaria will emerge from the depression in four years

- Mr. Harsev, how do you assess the basic parameters set out in the consolidated fiscal programme for next year, ie. the growth of 2.9% against the background of a possible new European recession?
- The estimates of the GERB government differ from the expected actual budget revenues. At that point, the budget is actually calculated based on the 1% level of the Bulgarian economic growth. Between the first and second parliamentary reading of the fiscal programme, news schemes for budget rebalancing at 0% will be sought. This also means a new reduction of the budget expenditures. As you can see, the EU opted for a contraction of expenditures by 2%, which corresponds to a growth forecast of 0.5%.

- What challenges will the banking system face next year?
- I am not expecting any significant changes in the current situation of the Bulgarian banking system at least until Bulgaria finally emerges from the phase of economic depression. The first positive signal will pertain to the increasing prices in view of the expectations of higher incomes. Afterwards, we will witness a gradual recovery of the credit and economic activity as well as rapid improvement of financial performance and reduction of bad loans. The secured assets, which banks cannot sell as collateral now will be finally sold. For example, in the town of Bansko, nearly two thirds of all apartments are secured by bank collaterals, which the financial institutions are willing to sell gladly and instantly, at a price level of €300-400 per sq m. Only that, currently, there is nobody to purchase them even at the price of €200.

- When can we expect such positive signs?
- According to the German Chancellor Angela Merkel, they could be expected in 10 years, but I think this would happen in 4 years. Analysing the recessive phase of the crisis cycle and comparing the processes with the historical Great Depression, I think the current stage of the economic depression will last about 7 years. That is, 3 years have elapsed so far and another four are remaining. The recession actually shows the steep collapse of the economy.  The phase of economic breakdown could explain the meaning of the economic recession. Afterwards, it is followed by an agonising depression. When an upswing is observed, then we could talk about economic recovery.

- Is there a place for Bulgaria in the Euro area?
- Yes, of course. The question is when Bulgaria will join the Eurozone in a long-term perspective. In the coming decade, our country is unlikely to join it, especially if the process of diffraction continues. It seems to me that the Eurozone countries will differentiate themselves into the EU core and periphery, which I think will bring greater stability. But I am not sure that the core countries will be equivalent to the Euro area member states. For instance, currently, there is outlined level of integration in France and Germany, but it will very difficult followed by the other countries in the European Economic and Monetary Union. It seems to me that Bulgaria will manage to join the Euro area and remain on the EU periphery because for us this place is more cost-effective and more competitive.  In fact, we will derive no benefit from harmonising our taxes with the German ones, thus depriving ourselves of our primary advantage. Therefore, for now, it is not clear yet what will be the future direction for the further Eurozone development. And as regards Bulgaria, before the issuance of the final decision on our Euro area accession, we must wait long enough to see clearly what will be our commitment since the eligibility criteria are only the formal part of our Eurozone admission.

- You mentioned that the low taxes are our major advantage, but we are hardly witnessing any foreign investments...
- We have registered a good rate of capital formation over the recent years and we see its favorable features. For example, the increasing degree of the financial system autonomy is a very good indicator. An increasingly large part of the assets of Bulgarian banks are financed by the own savings of the Bulgarian economy and households.

- On the other hand, isn't this bad for our economy since instead of being invested the funds are deposited in secure savings bank accounts?
- No savings are being invested into businesses, in general. It is only in conditions of very well developed financial markets and larger individual deposits that manageable individual portfolios of households may be set up. Our households are still holding single deposits below the threshold line. In fact, the average amount of savings is far below the government guaranteed deposit limit.

- But you could set up a company with less than €100,000 of investment?
- You could establish a company with less investment, but a manageable individual financial portfolio cannot be set up with the investment of BGN 1 mln because you must cover the the expenses of the manager. Abroad the line would be of some BGN 10 mln. It is also a fact that only households holding saving deposits worth over BGN 100,000 start developing and drafting strategies for new business projects. Before reaching this deposit threshold, the best solution for the funds is to remain deposited with the saving bank accounts. You could also make some smart calculations for the passive funds management. For example, this could happen by opening deposits worth up to BGN 100,000 in various banks, while aiming at highest profitability and government guaranteed deposit limits.

- A large growth of deposits of more than BGN 1 mln is also noticeable..?
- Many people mistakenly associate the volume increase in deposits, including household savings with the accumulation of wealth. And this is rather an indication of the exact opposite. This increase in deposits refers to the trade entities expelled from the market such as former sole traders, subcontractors, small retailers, etc. Their capital is deposited with bank savings accounts. That is, if we observe increasing deposit growth, this means that small retailers and manufacturers are losing.

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